Question

The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 5% per year. Callahan's common stock currently sells for $24.50 per share; its last dividend was $1.80; and it will pay a $1.89 dividend at the end of the current year. Using the DCF approach, what is its cost of common equity

Answer 1

Answer:

12.71%

Explanation:

The computation of the cost of common equity using the DCF approach is shown below:

As we know that

Cost of common equity = Current year dividend ÷ Current price of the stock + growth rate

= $1.89 ÷ $24.50 + 0.05

= 0.0771 + 0.05

= 12.71%

We simply applied the above formula so that the cost of common equity could arrive